£8,000 in cash? Here’s how I’d invest for a £6,960 second income

Investing for a second income isn’t always about investing in dividend-paying stocks. Dr James Fox details his growth-oriented strategy.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’d love a second income. I’m sure most of us would. So, how could we turn just £8,000 into a second income worth £6,960 annually?

It’s not about dividends, for now

The trick to turning £8,000 into a second income isn’t dividend stocks, it’s about growing our portfolios into something much bigger. In the near term, we have to accept that £8,000 invested in stocks and shares isn’t going to give us a second income worth much more than £600 a year.

However, if we invest wisely in growth-oriented stocks, we could see our £8,000 grow much quicker. Personally, I like to use a data-driven approach, and I invest most of my capital into companies with strong price-to-earnings growth (PEG) ratios.

The PEG ratio is calculated by dividing the forward price-to-earnings (P/E) ratio by the expected annual growth rate of the medium term. For example, AppLovin (NASDAQ:APP) currently trades at 16 times forward earnings, but the expected growth rate is 20% annually. In turn, this gives us a PEG ratio of 0.8. Anything under one is very attractive.

This is the type of stock driving my portfolio forward. In fact, I’m already up 113% on AppLovin. But the secret sauce is compound interest. If I’m reinvesting my returns, my portfolio will grow faster and faster over time.

A little more on AppLovin

AppLovin recently beat earnings estimates for the first quarter of 2024 — it’s the company’s fourth straight earnings beat.

AppLovin empowers mobile app creators to succeed. It provides tools for marketing, advertising, data analysis, and even publishing apps. It also runs Lion Studios, which helps developers build and publish winning mobile games. The firm also invests in other game developers and operates a diverse portfolio of free-to-play mobile games.

Investors may be concerned about the company’s record for revenue growth. It was pretty shaky with revenue annually falling backwards during a couple of quarters in 2022 and 2023.

However, the release of AXON 2.0 appears to be driving the company’s recent surge. The AI engine helps boost customers’ earnings by recommending apps for individuals based on their activities and preferences.

In short, the better AppLovin’s customers do, the better the California-based company does itself. According to management, AXON 2.0 hasn’t been integrated fully by all its gaming clients, suggesting more growth to come.

When is it time for a second income?

When do we stop investing for growth and start taking a second income? Well, that’s up to us individually.

If I were to average a 12% annualised return over the next 20 years, I could turn £8,000 into £87,000. That would be enough to generate a second income worth around £6,960 a year, assuming an 8% dividend yield.

Source: thecalculatorsite.com

This is just an example. Some analysts may say 12% isn’t easily achievable, but I’d beg to differ.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in AppLovin Corporation. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

£9,000 in savings? That could become passive income of £19,175 a year

It's possible to invest affordable sums of money into building a big passive income stream. Here's how I'd go about…

Read more »

Black father and two young daughters dancing at home
Investing Articles

Legal & General shares: a once-in-a-decade passive income opportunity?

Is a dividend yield at its highest level in a decade, combined with a strong record of increasing payouts, a…

Read more »

Investing Articles

With a 7% yield and 4.1 P/E, is this the best passive income stock on the FTSE 350?

Millions of Britons invest for a passive income. While our writer isn't buying this stock yet, he believes it's worth…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

This amazing FTSE 250 has a 8.8% dividend yield and trades at just 4x forward earnings!

Our Foolish writer believes this FTSE 250 stock is worth keeping a very close eye on. However, he's not keen…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Could this brilliant airline stock be the most undervalued company on the FTSE 100?

Our writer believes this FTSE 100 stock may provide market-beating returns over the coming years, noting its undervalued metrics and…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

The Rolls-Royce share price is discounted by 13.4%, analysts say

Our writer explains why analysts think the Rolls-Royce share price is lower than it should be, noting long-term earnings growth…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

If I’d invested £100 when the Lloyds share price crashed 15 years ago, here’s what I’d have now

Our writer thinks the Lloyds share price will see a period of steady growth in the coming years despite a…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

Is Nvidia stock now becoming a joke?

Nvidia stock is up 155% in 2024 alone and the AI golden child has become the largest company in the…

Read more »